As the dinosaur wireline businesses creep toward extinction, telecom companies like
are getting a big boost from an unlikely offering: video.
Ten years ago, it would've been hard to believe that a phone company would find a savior in video, but as the fierce competition between AT&T, Verizon and cable operators heats to a boil, it seems the telecom companies' best defense is business diversity.
As deregulation and technological advances have worn away at pure-play wireline companies, only those that have contained the substantial costs by upgrading their networks to handle video and high-definition broadcasts have shown an ability to fend off cable competition.
The addition of video segments is providing a much-needed boost to combat subscriber losses, as the so-called triple-play packages of phone companies have failed to get much traction.
Last month, for instance, AT&T said that U-verse video connections jumped by 148,000 to 379,000 in the first quarter. AT&T predicts its U-verse service will exceed one million subscribers by year-end. Total video connections, which include AT&T U-verse service and bundled satellite television service, rose by 264,000 in the first quarter to 2.6 million.
AT&T's main rival Verizon recently said it added 263,000 net new FiOS TV customers in the first quarter, pushing the total to 1.2 million subscribers.
On the other side, cable operators are already faltering under the pressure. Earlier this month,
said it saw its basic video subscriber count fell by 57,000 in the first quarter.
Time Warner Cable
posted only a modest increase in basic video subscribers.
Telecom companies aren't letting up, either. Earlier this month, AT&T launched its wireless mobile television service for cell phones with the help of
MediaFLO service, which also operates Verizon's V Cast Mobile TV service.
"Carriers with multiple market segments have the most protection against competition and are in the best position for growth," says Standard & Poor's analyst Richard Siderman in a note. "Additionally, if Verizon, AT&T, and other wireline operators can successfully deploy their video products while containing the substantial capital costs involved, a new and significant source of cash flow will develop as 2008 unfolds."
Cable operators are already doing their best to sweep video subscriber losses under the rug. During its recent first-quarter conference call,
COO Thomas Rutledge told an analyst the company will no longer provide investors with the key metric of average monthly churn rates, which measure the number of subscribers that quit a service.
"With regard to churn, we uniquely among the cable companies have historically reported churn and we thought that being alone like that made no sense going forward, so we decided to quit reporting churn," Rutledge said. "It's not necessarily a good number to use because it differs by definition."
S&P's Siderman says that although the outlook for the cable industry remains favorable, telephone operators are a serious threat to cable operators' cash flow.
"In recent quarters, many larger cable operators have reported some degree of basic customer erosion and, at least in the short-term, there's no reason to believe that they will be able to reverse these losses," he says.
"Satellite continues to take share from cable, as do Verizon's and AT&T's video ventures. But for many cable operators, revenue generating unit growth could begin tailing off this year as high-speed Internet connectivity matures. Additionally, competitive factors could limit cable price increases."
High-speed Internet connections aren't showing signs of complete saturation yet. Cablevision said it is planning to offer high-speed wireless Internet service across its coverage area in the New York region in order to combat penetration from Verizon. During the first quarter, Cablevision saw a year-over-year decline in basic video customers while the number of Optimum Online subscribers grew nearly 11%.
Comcast, meanwhile, saw increases in high-speed Internet subscribers during the first quarter, even as quarterly net subscriber additions are down year over year. Still, Comcast saw total Internet customers jump 13% from a year earlier.
But even satellite companies aren't immune to AT&T and Verizon's push into video, either.
recently offered cautious comments regarding slowing growth and higher customer attrition.
"Our competitors are increasingly offering video service bundled with 2-way high-speed Internet access and telephone services that consumers may find attractive and which are likely to further increase competition," the company said. "We also expect to face increasing competition from content and other providers who distribute video services directly to consumers over the Internet."
That news is music to the ears of AT&T and Verizon shareholders, as both stocks have lost ground on the year. UBS analyst John Hodulik said in a note that while AT&T's access line losses were worse than expected in the first quarter, broadband and U-verse video additions provide upside for the stock.
"Management stated that it was regularly seeing 10% or better penetration in a market once U-verse video was available for 12 months," said Hodulik. "We are maintaining our expectations for 865,000 net adds for the year, bringing the total to 1.1 million. Net adds should get a boost from the further roll out of the service."
Stifel Nicolaus analyst Christopher King says that a target of 1 million or more U-verse subscribers is a pace that clearly implies a significant ramp in subscriber growth in the second half of the year.
Verizon should also see margin improvement on the wireline side of the company, as variable costs, FiOS-related expenditures, price increases for FiOS-related products, and a potential dramatic increase in FiOS penetration over the next year or two, should drive stronger margins," said King in a note.